In­vest­ment for sus­tain­able growth

Financial Mirror (Cyprus) - - FRONT PAGE -

The big dis­ap­point­ment in the world econ­omy to­day is the low rate of in­vest­ment. In the years lead­ing up to the 2008 fi­nan­cial cri­sis, growth in high-in­come coun­tries was pro­pelled by spend­ing on hous­ing and pri­vate con­sump­tion. When the cri­sis hit, both kinds of spend­ing plum­meted, and the in­vest­ments that should have picked up the slack never ma­te­ri­alised. This must change.

Af­ter the cri­sis, the world’s ma­jor cen­tral banks at­tempted to re­vive spend­ing and em­ploy­ment by slash­ing in­ter­est rates. The strat­egy worked, to some ex­tent. By flood­ing cap­i­tal mar­kets with liq­uid­ity and hold­ing down mar­ket in­ter­est rates, pol­i­cy­mak­ers en­cour­aged in­vestors to bid up stock and bond prices. This cre­ated fi­nan­cial wealth through cap­i­tal gains, while spurring con­sump­tion and – through ini­tial pub­lic of­fer­ings – some in­vest­ment.

Yet this pol­icy has reached its lim­its – and im­posed un­de­ni­able costs. With in­ter­est rates at or even be­low zero, in­vestors bor­row for highly spec­u­la­tive pur­poses. As a re­sult, the over­all qual­ity of in­vest­ments has dropped, while lever­age has risen. When cen­tral banks fi­nally tighten credit, there is a real risk of sig­nif­i­cant as­set-price de­clines.

As mone­tary pol­icy was be­ing pushed to its lim­its, what went miss­ing was an in­crease in long-term in­vest­ments in high-speed rail, roads, ports, low-car­bon en­ergy, safe wa­ter and san­i­ta­tion, and health and ed­u­ca­tion. With bud­get aus­ter­ity re­strain­ing pub­lic in­vest­ment, and ma­jor un­cer­tain­ties con­cern­ing pub­lic pol­icy and in­ter­na­tional tax­a­tion ham­per­ing pri­vate in­vest­ment, such spend­ing has gen­er­ally de­clined in the high-in­come coun­tries.

De­spite US Pres­i­dent Barack Obama’s prom­ises of in­vest­ment in high-speed rail and other mod­ern in­fra­struc­ture, not one mile of fast rail was built dur­ing his eight years in of­fice. It is time to trans­late words into ac­tion, in the United States and else­where, and usher in a new era of high in­vest­ment in sus­tain­able de­vel­op­ment.

There are three chal­lenges fac­ing such a strat­egy: iden­ti­fy­ing the right projects; de­vel­op­ing com­plex plans that in­volve both the pub­lic and pri­vate sec­tors (and of­ten more than one coun­try); and struc­tur­ing the fi­nanc­ing. To suc­ceed, gov­ern­ments must be ca­pa­ble of ef­fec­tive long-term plan­ning, bud­get­ing, and project im­ple­men­ta­tion. China has demon­strated th­ese ca­pa­bil­i­ties in the last 20 years (though with ma­jor en­vi­ron­men­tal fail­ures), whereas the US and Europe have been stymied. The poor­est coun­tries, mean­while, have of­ten been told by the Mone­tary Fund and oth­ers not even to try.

To­day, gov­ern­ments will have some help in over­com­ing at least one of the key chal­lenges. The Sus­tain­able De­vel­op­ment Goals (SDGs) and the Paris Cli­mate Agree­ment will help to guide them to­ward the right projects.

The world needs mas­sive in­vest­ments in low-car­bon en­ergy sys­tems, and an end to the con­struc­tion of new coal­fired power plants. And it needs mas­sive in­vest­ments in elec­tric ve­hi­cles (and ad­vanced bat­ter­ies), to­gether with a sharp re­duc­tion in in­ter­nal com­bus­tion en­gine ve­hi­cles. The de­vel­op­ing world, in par­tic­u­lar, also needs ma­jor in­vest­ments in wa­ter and san­i­ta­tion projects in fast-grow­ing ur­ban ar­eas. And low-in­come coun­tries, in par­tic­u­lar, need to scale up health and ed­u­ca­tion sys­tems.

China’s “one belt, one road” ini­tia­tive – which aims to link Asia to Europe with mod­ern in­fra­struc­ture net­works – will help to ad­vance some of th­ese goals, as­sum­ing the projects are de­signed with a low-car­bon-en­ergy fu­ture in mind. That ini­tia­tive will boost em­ploy­ment, spend­ing, and growth, es­pe­cially in the land­locked economies across Eura­sia. It should even de­liver new dy­namism to eco­nomic and diplo­matic re­la­tions among the Euro­pean Union, Rus­sia, and China.

A sim­i­lar pro­gram is needed ur­gently in Africa. Although African coun­tries have al­ready iden­ti­fied pri­or­ity in­vest­ments for elec­tri­fi­ca­tion and trans­port, progress will re­main slow with­out a new wave of in­vest­ment spend­ing.

African coun­tries’ com­bined spend­ing on ed­u­ca­tion alone should in­crease by tens of bil­lions of dol­lars per year; com­bined in­fra­struc­ture spend­ing should surge by at least $100 bil­lion per year. Th­ese needs should be cov­ered mostly by long-term, low-in­ter­est-rate loans from China, Europe, and the US, as well as by mo­bil­is­ing African coun­tries’ longterm savings (through, for ex­am­ple, the in­tro­duc­tion of new pen­sion sys­tems).

The US and Europe also need ma­jor new in­fra­struc­ture pro­grams. The US – where the last big in­fra­struc­ture project, the na­tional high­way sys­tem, was con­cluded in the 1970s – should em­pha­sise in­vest­ment in low-car­bon en­ergy, high­speed rail, and the mass up­take of elec­tric ve­hi­cles.

As for Europe, the Euro­pean Com­mis­sion’s In­vest­ment Plan for Europe – dubbed the “Juncker Plan,” for Com­mis­sion Pres­i­dent Jean-Claude Juncker – should be­come the EU’s SDG pro­gramme. It should fo­cus, for ex­am­ple, on cre­at­ing a Europe-wide trans­mis­sion grid for low-car­bon en­ergy, and on a mas­sive in­crease in re­new­able­power gen­er­a­tion.

To help fi­nance such pro­grams, the mul­ti­lat­eral de­vel­op­ment banks – such as the World Bank, the Asian De­vel­op­ment Bank, and the African De­vel­op­ment Bank –

In­ter­na­tional should raise vastly more long-term debt from the cap­i­tal mar­kets at the pre­vail­ing low in­ter­est rates. They should then lend those funds to gov­ern­ments and pub­lic-pri­vate in­vest­ment en­ti­ties.

Gov­ern­ments should levy grad­u­ally ris­ing car­bon taxes, us­ing the rev­enues to fi­nance low-car­bon en­ergy sys­tems. And the egre­gious loop­holes in the global cor­po­rate-tax sys­tem should be closed, thereby boost­ing global cor­po­rate tax­a­tion by some $200 bil­lion an­nu­ally, if not more. (Amer­i­can com­pa­nies are cur­rently sit­ting on nearly $2 tril­lion in off­shore funds that should fi­nally be taxed.) The added rev­enues should be al­lo­cated to new pub­lic in­vest­ment spend­ing.

For the poor­est coun­tries, much of the needed in­vest­ment should come through in­creased of­fi­cial de­vel­op­ment as­sis­tance. There are sev­eral ways to gen­er­ate that ex­tra aid money via a re­duc­tion of mil­i­tary spend­ing, in­clud­ing by end­ing the wars in the Mid­dle East; de­cid­ing firmly against a next gen­er­a­tion of nu­clear weapons; cutting back on US mil­i­tary bases overseas; and avoid­ing a US-China arms race through en­hanced diplo­macy and co­op­er­a­tion. The re­sult­ing peace div­i­dend should be chan­nelled to­ward health care, ed­u­ca­tion, and in­fra­struc­ture in to­day’s im­pov­er­ished and war-torn re­gions.

Sus­tain­able de­vel­op­ment is not just a wish and a slo­gan; it of­fers the only re­al­is­tic path to global growth and high em­ploy­ment. It is time to give it the at­ten­tion – and in­vest­ment – it de­serves.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.